Grillick's got it. But formulae like that are ugly, so here's a (not too horribly) simplified explanation.

Imagine the GDP of our hypothetical country is $10T. That represents a measure of the entire output of the economy.

Now the government decides to spend $4T on various things. Therefore, there is $6T dollars left for us to spend privately, as we see fit. In other words, the government has to find a way to make us all spend $4T less, in order to finance their projects. The most open and aboveboard method to force us to spend less privately is to tax us to the tune of $4T. Now, you might say, the government doesn't have to tax us $4T. They could tax us $3T and run a $1T budget deficit. But that's wrong. There is no way for the government to spend $4T out of our $10T GDP by getting us to spend only $3T less privately. It has to be $4T less.

Another method they could use to force us to spend less privately is to print money and inflate the currency. Rising prices then reduce our ability to spend privately since each dollar we hold won't buy as much (This is a nice one for the government because they can make it look like they're not really taking away private money, because most people will only look at nominal wages and prices, not real wages and prices). Yet another way is for the government to borrow, thereby reducing our ability to spend privately.

All of this means that in any real economic sense the budget is always balanced. That is, if the government spends $4T we must privately spend $4T less whether it is accomplished through taxation, inflation or borrowing.

So, let's say that the government taxes each of us $500 to put toward creating construction jobs building our infrastructure. The beneficiaries will be quite visible, namely men employed building some road or bridge. The victims are invisible and are only revealed by asking what we would have done with the $500 if it were not taxed away from us. Anything we would have spent it on would have contributed to someone's employment. That person is the invisible victim.

Finally, I'd note that private spending is almost always more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money. I don't know about you, but I can't remember ever having to worry that my spouse was throwing money into a pork project to buy votes from the milk lobby. I also can't remember the last time I wanted to buy something but couldn't because my family's appropriations process took a minimum of six months and there was only three months left to the end of the fiscal year. So, no, not all spending is created equal.

Now, you might say, the government doesn't have to tax us $4T. They could tax us $3T and run a $1T budget deficit. But that's wrong. There is no way for the government to spend $4T out of our $10T GDP by getting us to spend only $3T less privately. It has to be $4T less.

Does the reason why have to do with deficit spending raising interest rates? If not, could you explain?

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All of this means that in any real economic sense the budget is always balanced. That is, if the government spends $4T we must privately spend $4T less whether it is accomplished through taxation, inflation or borrowing.

Was anybody actually arguing that the government could spend more money than the amount that exists? Obviously government spending doesn't in and of itself create money. The argument for government spending is that sometimes government can do it better. I'll address that when you do below.

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So, let's say that the government taxes each of us $500 to put toward creating construction jobs building our infrastructure. The beneficiaries will be quite visible, namely men employed building some road or bridge. The victims are invisible and are only revealed by asking what we would have done with the $500 if it were not taxed away from us. Anything we would have spent it on would have contributed to someone's employment. That person is the invisible victim.

But not all employment is equal. If the government takes $500 that would have been spent, say, digging and filling a hole over and over again, and puts it toward an activity with positive externalities, then value is created. We all end up as invisible beneficiaries.

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Finally, I'd note that private spending is almost always more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money. I don't know about you, but I can't remember ever having to worry that my spouse was throwing money into a pork project to buy votes from the milk lobby. I also can't remember the last time I wanted to buy something but couldn't because my family's appropriations process took a minimum of six months and there was only three months left to the end of the fiscal year. So, no, not all spending is created equal.

That's rather one-sided. People are idiots with their own money all the time. They buy big screen TVs they don't need and waste electricity and live beyond their means and keep that Billy Bass company afloat. I agree that not all spending is created equal; I disagree that the government is "almost always" less efficient. The benefit of government aggregation is, first, that decisions are generally carefully considered (in fact, one of your complaints up there is that they take TOO long) and made by a bunch of presumably intelligent people who at least pay lip service to the idea that they're there to serve the common good, and, second, so that the government can throw that money's weight around and take advantage of efficiencies of scale.

Does the reason why have to do with deficit spending raising interest rates? If not, could you explain?

Deficit spending requires the government to borrow money. Borrowing money requires that there be a lender. If that lender is a household in the United States, then government borrowing decreases C. If that lender is a firm in the United States, then government borrowing decreases I. If that lender is not in the United States, then government borrowing decreases NX.

Dudes, I think you're conflating fiscal and monetary policy. I probably started it, but they're two different things.

Fiscal policy is when the government spends money out of its coffers in an attempt to create jobs, boost consumption, or whatnot. It builds roads and gives out food stamps and tax rebates, that sort of thing. The effectiveness of fiscal policy is heavily disputed.

Monetary policy is when the Fed raises or lowers interest rates. This is not about government spending (the G in Grillick's equation). It's about adjusting the amount of money there is in circulation. To put things crudely, when there's more money sloshing about in the system, people are more willing to spend. When there's less money sloshing around, people will hold on to it instead. For the last thirty or forty years, messing around with the money supply has been successful in combating garden variety recessions (the present crisis excepted). It is widely accepted among economists as the first line of economic defence.

It's also instantaneous - no waiting around for government to send out cheques or start building roads. All the Fed (or National Bank) has to do is buy or sell bonds on the open market. (I can dig out my old econ textbook and explain how that works if anyone's interested but I don't want to go all Economics 101 without warning on the rest of you.)

By the way, every US state is already currently capable of conducting its own fiscal policy within certain budgetary limits, but they don't have their own monetary policies, which would require each to have its own currency.

And if you guys are going to keep discussing the heavy duty stuff, I'd better move this to POOP. I'm going to check on this thread sometime late tomorrow (I'll be on a plane for 8 hours) and if it's still extremely wonkish I'm getting out the Acme forklift truck.

Sometimes I do suspect that america is trying to impose its laws upon the rest of the world. The only ones it can actually get away with generally are the ones that Europe agrees with (and is trying to do the same with, in some general sense).

For reference, the vast majority of Americans have no intention of doing so.

On the other hand, this may not be reassuring to a Briton, since Britain became one of the world's largest empires without actually planning to do it at any point until after it was already a fait accompli.

Fiscal policy is when the government spends money out of its coffers in an attempt to create jobs, boost consumption, or whatnot. It builds roads and gives out food stamps and tax rebates, that sort of thing. The effectiveness of fiscal policy is heavily disputed.

Monetary policy is when the Fed raises or lowers interest rates. This is not about government spending (the G in Grillick's equation). It's about adjusting the amount of money there is in circulation. To put things crudely, when there's more money sloshing about in the system, people are more willing to spend. When there's less money sloshing around, people will hold on to it instead. For the last thirty or forty years, messing around with the money supply has been successful in combating garden variety recessions (the present crisis excepted). It is widely accepted among economists as the first line of economic defence.

The best monetary policies in the world can be easily undermined by poor fiscal policies.

If you look at how monetarism first looked at the best ways to formulate monetary policy, there's an underlying assumption that a fiscal policy that favors private spending is better. It's in the idea of the velocity of the money's circulation. It doesn't matter how much the government spends, the number of links or transactions between a government and it's various suppliers and employees is always orders of magnitude lower than the number of transactions carried out by the bulk of the population simply going about their day to day business. Meaning that the velocity of money is also different by orders of magnitude. And the velocity contributes immensely to the "sloshiness" of the system, directly impacting whether or not people are going to spend.

Hence, even if a good monetary policy allows for more money to circulate, a poor fiscal policy can drive the velocity of circulation down to the point where the situation stalemates, or even gets worse.

For reference, the vast majority of Americans have no intention of doing so.

On the other hand, this may not be reassuring to a Briton, since Britain became one of the world's largest empires without actually planning to do it at any point until after it was already a fait accompli.

America tends to be represented by the few. The loud ones, and the ones with international clout.The majority of the population gets effectively no say in what the country does outside the miniscule influence of their individual votes in general elections (which are usually biased by political manipulation and social influence anyway).

And that is why I dislike america, but am generally completely alright around individual americans.

Kea wrote:

And if you guys are going to keep discussing the heavy duty stuff, I'd better move this to POOP. I'm going to check on this thread sometime late tomorrow (I'll be on a plane for 8 hours) and if it's still extremely wonkish I'm getting out the Acme forklift truck.

America tends to be represented by the few. The loud ones, and the ones with international clout.The majority of the population gets effectively no say in what the country does outside the miniscule influence of their individual votes in general elections (which are usually biased by political manipulation and social influence anyway).

I'm home, and this is going to POOP. Not pointing fingers or anything (I love wonkery as much as the next POOPster), just keeping things in the right places. Having this thing stay in GC was probably a long shot anyway.

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